Why Education Startups Haven’t Succeeded, Yet

I was one of the six people that met with Avichal to ask for his opinion regarding the education space. I remember speaking with him while we were still undergraduate students, and his company, PrepMe, was starting to receive traction.

His provocative article entitled, “Why Education Startups Do Not Succeed“,  initiated a good deal of enlightened discourse amongst both entrepreneurs and educators alike. While I don’t fully disagree with all of the points found in the article, I do want to give my thoughts on Avichal’s main points in hopes that it’ll continue this healthy discussion on the future of online education.

Argument 1: Most entrepreneurs in education build the wrong type of business, because entrepreneurs think of education as a quality problem. The average person thinks of it as a cost problem.

Avichal is arguing that the educated few in America view quality as the primary factor in their purchasing decision, and are thus price insensitive when it comes to education spending. On the other hand, the majority of Americans think of education as an immediate cost, and are thus unwilling to spend on anything outside of compulsory education.

This argument constitutes the basis of Avichal’s reasoning on why online education start-ups don’t succeed and is fundamentally an argument I disagree with. Any person, “educated” or “average”, will not put education inside a vacuum and look at it purely as a cost or quality problem.

From every microeconomics course that I’ve taken at Stanford, the basic tenant is that individual purchasing decisions rely upon the relationship of both the price and the quantity of the good or service. The good or service, in this case, is education.

The implication of the above argument is that the educated few are price inelastic and will continue to demand for education even if subjected to a substantial increase in price. Perhaps, that is true. If my total tuition cost had doubled, my parents would still try to find a way to help support me and I would have to take an even larger loan. However, at a certain price point, for example $1 million for 4 years, we would have to seriously reconsider attending a prestigious university, and I am Asian-American. In fact, there is a movement amongst the very educated, most prominently Peter Thiel and Michael Arrington, advocating forgoing higher education due to its inflated costs and unjustified value.

[Please see: Infographic –  The Higher Education Bubble]

Lets refocus on the average American since that portion of the argument is most surprising to me; essentially, the average person is price elastic when it comes to education, and therefore a rise in price would cause their demand to drop to zero. Education is mandated by the government, and as a result, is immediately free, not taking into consideration that it’s tax payers’ money. If we assume for a moment that education is no long compulsory nor provided by the government, what would the average American do? I am not part of the 50% of America that don’t have beyond a high school degree, but I will assume that most Americans won’t neglect to provide their children with some type of education, at least through primary schooling. I would hope that is the case for the sake of this country.

I don’t know exactly why more people are not paying for learning outside of compulsory education. Perhaps, it’s a complete trust in the education system. After all, shouldn’t our school system adequately prepare our children for the next level? Perhaps, it’s a complete distrust of the education system. After all, if our school system failed to provide us and our children with basic literacy and math fundamentals, what is the point of test-prep and higher education?

I do know, as immigrants to this country, we came to America with a clean slate in regards to the U.S. school system. There were no prior experiences on my parents part to believe that a high school diploma can guarantee a stable factory job and life. Nor, did they have any any reason to distrust the system; why would they come to America, otherwise. We also arrive inherently disadvantaged, and thus every additional bit of education matters more to us.

Avichal argues that for “the poor, correlating with being African American and Hispanic, affordable, but poor quality approaches just aren’t good enough; these communities are on the hunt for dramatically better approaches and willing to try new things.” Khan Academy’s demographic chart is used to support this.

However, my perspective is that African-Americans (152 score), with past experiences of the school system failing them, are willing to try an approach outside of the traditional classroom, while the immigrant ethnic groups, Asian and Hispanic (scores of 270 and 232, respectively) want that additional resource to catch-up with their Caucasian classmates.

Argument 2: Building in education does not follow an Internet company’s growth curve. Do it because you want to fix problems in education for the next 20 years.

I completely agree with the latter part of this argument, but not entirely with the first part. There are hard, rigid bureaucratic obstacles standing in the way of any true reform of the education system. The documentary, “Waiting for Superman“, did the best it could within 102 minutes to explain how difficult it is to advance or make changes to our current education system, a system that has not changed in the past half century.

Education might not be ripe for disruption, but that doesn’t mean it doesn’t deserve to be disrupted. Alvin Toffler believes as much and Bill Gates believes as much. It certainly won’t be disrupted at the policy level, as many educators and reformers have tried in earnest and failed. It has to be disrupted in a space where there won’t be regulations or unionized workers prohibiting change. The only area I can think of is the Internet, and what a disruptive agent the Internet can be.

To build a company that’s tackling a problem as large and important as education, it should stand to last at least 20 years. The next great education company shouldn’t have the mentality of a mobile social gaming company, nor even a social network or video-sharing website. These companies are able to have the typical Internet growth curve because it is free.

The three consumer focused education companies that Avichal provided as examples (Tutor.com, TutorVista, Globalscholar), inherently, have a scalable cost, which are their hired tutors, and they must transfer that cost to consumers. Anytime, there’s a cost associated with a consumer website, growth will always be significantly slower than expected, especially for something as immaterial as knowledge.

The other problem these companies face is that there is already an incumbent competitor, which are traditional schools. There is already knowledge dissemination at these schools for 8 hours a day. Tutoring companies, traditional or online, are supplemental services to traditional schooling, and as such, shouldn’t be expected to have a hockey-stick growth curve.

Currently, what can be considered a game-changing, direct competitor to traditional schooling?

For some people, it’s Khan Academy. Khan Academy and schools are already on equal footing in terms of cost, so the only differentiator is the quality, and for some people Salman Khan’s recorded lectures are of much higher quality than that of their math teachers.

However, there are two problems I have with Khan Academy. The first is that recorded lectures, albeit great for an initial explanation, falls at the wayside when an individual is stuck on a concept or has questions; in the other words, it’s a very one-dimensional way of learning. Khan Academy is able to get away with it because Salman Khan’s explanations of mathematical and scientific concepts are so lucid and clearly-explained. In addition, industrious teachers have begun to augment their classrooms with his lectures, while concentrating on what teachers are supposed to do: providing the individual attention necessary so that all students are ready to learn the next material.

The second problem I have is that Salman Khan is one individual attempting to scale. While his lectures on math and science are superb, other subjects, as one critic pointed out, specifically citing Khan’s history lectures, are sub-par.

Khan Academy has planted the seed that online education can be effective; Stanford’s new initiative with their online computer science courses is inspired by Khan academy. However, in order for there to be lasting growth, an online education company should be a platform; a way to connect outstanding teachers with willing students, while eliminating the distance barrier. It should be a platform much like eBay is a platform that connects buyers and sellers, and eBay certainly had the Internet growth curve people are looking for.

Khan Academy and the other tutoring companies mentioned are constrained by the supply of quality teacher(s). A platform would solve the bottleneck by finding, curating, and scaling the number of quality teachers available.

Argument 3: There are opportunities in education in servicing the poor in the US and building a company in Asia — not in selling to the middle class in the US.

Argument 3 is an extension of argument 1, although the logic implied here is that since the average American considers education to be an expenditure, business opportunities can’t exist. I don’t agree that the average American considers education purely as an expenditure, as explained above. But even if they did, health care in America is considered an expenditure, yet more money per person is spent on health care in the U.S. than any other country in the world (1) and 83.3% of the population have insurance of some kind (2).

However, I won’t dispute the argument that there are opportunities to be had in Asia, but not for the reasons stated. Avichal claims that a non-educated person in Kansas will not die homeless, while a non-educated Chinese person would. I don’t think that’s true, and it’s certainly not true in Korea and Japan, yet countries in most of Asia have similar attitudes towards education.

If we look at the societal incentives of these Asian countries, I think we’ll have a better understanding of why there is such an emphasis on education in Asia, and possibly find a reason why education companies in the U.S. haven’t seen spectacular success.

The incentive structure in China is set-up in such a way that one of the few ways to advance in life is to acquire a diploma, even better multiple diplomas, and even better still multiple diplomas from prestigious universities.  This quote from a lengthy article explains the importance of scoring well on the gaokao, the national college-entrance exam:

In China, there is a time-honored career domino effect: good gaokao score, top university spot, communist Party membership, job in the government bureaucracy.

When achievement in life is tied specifically to the words found on a piece of paper, everybody’s efforts will be focused on that piece of paper. On the other hand, in America, examples of success don’t necessarily revolve around a piece of paper. When there are possibilities of acquiring wealth and happiness by pursuing passions in music, sports, fashion, entrepreneurship, etc., obtaining that piece of paper is de-emphasized. Hence, the UnCollege movement.

A lot of education start-ups in the U.S. have been focused on preparing our students to succeed in a “gaokao” society, while the reality is that achieving success in the U.S. doesn’t necessarily depend on a perfect SAT score.

Education companies have seen partial success in America because their product is made for a “gaokao” society, yet America is only partially a “gaokao” society. A startup that focuses on the mentalities prevalent in the United States would have the opportunity to succeed with the middle class.

We should ask ourselves, if a student is solely interested in becoming a musician, poker player, or fashion designer, and has seen examples of their peers achieving these same goals, why are we offering them help only in math and verbal?

Education companies work in Asia because they focus on preparing students to overcome these mandated national exams. It will be more difficult to fulfill the diverse interests of our students, and as such, learning should take place on a platform of many different types of teachers.

Argument 4: The underlying culture will change and expose interesting opportunities in the long term, but probably not for another 5 years.

The opportunities that arise are continuous and dynamic; there will be opportunities throughout every single year with each new technological advancement and with the current rate of change. The point is to be proactive in regards to that changing culture as opposed to being a waiting bystander for 5 years. 

In fact, there has never been a better time to talk about education in the context of technology. We have advanced enough to glimpse the possibility of a world educated by the powers of the Internet. That much is evident by Avichal having to meet with so many entrepreneurs and VCs to explain his viewpoints.

I’ll conclude with a quote from Rupert Murdoch during the e-G8 summit in May.

The greatest change of all is the digital revolution, which frees people from the “tyranny of time and distance,” and it’s occurring in every field except one — education.

A teacher waking up from a 50-year nap would find a classroom looks almost exactly the same as it did in the Victorian era. My friends, what we have here is a colossal failure of imagination and an abdication of our responsibilities to our children and grandchildren.

In putting [our] creative force into schools we can ensure the poor child in Manila has the same chance as the rich child in Manhattan. The key to our future is to unlock this potential.

Thank you Joshua and Maurice for their feedback.

  • CDog

    wow so extensive

  • Ryansparzak

    You mind if I borrow this for my Graduate School Personal Statement.  Very well said.

    • Anonymous

      Ryan, of course! Sharing of knowledge can only make the world better. Good luck on your application.